Where Will Roku Stock Be in 5 Years?

The dawn of a new year brings opportunities, and streaming company Roku (NASDAQ: ROKU) could use some of that right now. It ended the year down 18% when the S&P 500 gained 26% -- a pretty terrible showing for 2024. Is there any hope left for Roku investors? Let's see where it could be in five years from now, and whether it's worth your investing dollars.

Revenue and engagement: growing

Non-investors know Roku for its streaming devices. But investors know that the device business is actually its smaller one; it makes most of its money from the ads it sells through its platform business. Roku operates an ad-supported streaming network, and as more members join and view more content, it sells more ad space and makes more money.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. See the 10 stocks »

In the third quarter, device sales increased 23% year over year, and platform sales increased 15%, for a company increase of 16%. The platform business accounted for 85% of sales. It's also a higher-margin business, and gross margin was 45.2% in the quarter, its highest since the 2023 second quarter.

Roku provides engagement metrics that tell more of the story than just the financial statements. Membership increased 13% year over year to more than 85 million households, but streaming hours were up 20%, implying that existing members are upping their hours.

The Roku channel, in particular, is growing quickly with streaming hours up 80% year over year in the third quarter. This is where the company has the potential to supercharge its ad business and keep revenue and engagement flowing in the right direction.

In five years, Roku should be a bigger platform, with more members and higher revenue. So far, it has maintained its position as the top streaming platform against some serious competition, and that bodes well for its future.

Platform: expanding

The way Roku's business stands today, it's taking a while to scale. Management is taking many concrete steps to correct that, although it will take time for these efforts to trickle down to bottom-line results.

One simple action is making a bigger push into international waters, and that should be a strong growth driver over the next five years. Management noted that a lot of its growth is happening on the international scene, where its focus is on picking up members and increasing engagement. The implication is that it's going to worry about the ad business later, and shareholders would need to have confidence that it has a plan to do so effectively. No one can guarantee that will happen, which is one reason the market might still be souring on Roku's prospects.

Roku is constantly upgrading to catch greater interest and see how it can leverage its platform to make more money. One recent development is the placement of ads on the home screen, so even if a viewer is coming on to stream a premium network, advertisers can still target that user. It's also cementing new partnerships and innovating with its platform. It added several Disney channels in the third quarter, and it worked with Ally Bank to create compelling viewing content promoting its services.

Profitability: improving

Roku is having trouble translating its growth and lead in the sector into profitable growth. In theory, the ad business should be strong enough to tip it into profitable territory. But the advertising industry has had its own pressures with inflation, and it's not keeping up with Roku's streaming hour growth. This is also where investors need to keep in mind the international piece, and that profits should follow when it can turn its focus on them after getting new members.

There are signs of healthy improvement. The third quarter was the fifth consecutive quarter of positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and trailing-12-month free cash flow. Don't expect positive net income anytime soon. Management is guiding for a $65 million loss in the 2024 fourth quarter, and Wall Street still sees large losses through the end of 2025.

Will Roku be profitable in five years? Considering its size, position, and improvements, the likelihood looks good.

Stock: gaining

Roku managed through several challenges in 2024, from the slow ad business to increasing competition. It has an important edge over other streaming platforms as the top player; each time someone buys a device, that becomes another pair of eyeballs to watch ads. 2025 could finally be its breakout year.

I would have a very hard time imagining that Roku stock won't reward investors over the next five years. A lot can happen over that time, as demonstrated by what's happened over the past five years. But barring something like another pandemic, which triggered the ensuing economic volatility, Roku is in good shape to reach its goals and become a solid multi-year investment.

Should you invest $1,000 in Roku right now?

Before you buy stock in Roku, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Roku wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $842,611!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of December 30, 2024

Ally is an advertising partner of Motley Fool Money. Jennifer Saibil has positions in Walt Disney. The Motley Fool has positions in and recommends Roku and Walt Disney. The Motley Fool has a disclosure policy.